February 14, 2020

EU sanctions prevent Iranian entity from obtaining interest on arbitration award

The UK Court of Appeal has decided that a UK company is not liable for interest on an arbitral award against an Iranian government entity for the period during which European Union sanctions have applied to that entity.  The Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran (MODSAF) won the arbitral award against International Military Services Limited (IMS), a UK government-held company, in 2001.  Subsequent litigation in several jurisdictions resulted in confirmation of  £127,651,823 plus interest from 1984 as the final sum of the arbitral award.

Since 2008, MODSAF has been subject to the European Union sanctions regime, now codified in Council Regulation No 267/2012, making it illegal for IMS to pay any part of the award to MODSAF.  However, while acknowledging that no payment may be made while Regulation 267/2012 is in effect, MODSAF applied to the High Court of Justice for a judgment declaring funds deposited earlier with the Court by IMS as held for the benefit of MODSAF.  The court directed that certain issues must be determined in advance of the hearing on MODSAF’s application, including whether IMS is liable for interest on the award from 2008, when the relevant sanctions regime took effect, to the present.  Relying on Section 38 of Regulation 267/2012, the High Court of Justice concluded that IMS should not be liable for interest during the sanctions period.  The Court of Appeal agreed, and approved the judgment of the lower court.